For businesses that contract with the U.S. government, navigating the financial landscape requires a specific set of skills and systems. A key component of this is the Defense Contract Audit Agency (DCAA) audit. These audits are essential for ensuring that taxpayer funds are used appropriately and that contractors comply with federal regulations. A failed audit can lead to significant penalties, delayed payments, and even the loss of future contract opportunities.Understanding the most frequent audit findings is the first step toward building a compliant and resilient accounting system. This post will outline several common issues identified during DCAA audits and provide actionable strategies to help your business avoid them, ensuring you remain a trusted government partner.
Inadequate Timekeeping Systems
One of the most scrutinized areas in a DCAA audit is labor costs, which are tracked through your timekeeping system. The DCAA requires that all hours worked on government contracts—both direct and indirect—are recorded accurately and contemporaneously.
Common Findings:
- Employees filling out timesheets days or weeks after the work is performed.
- Supervisors altering employee timesheets without proper justification and employee approval.
- Lack of clear distinction between direct and indirect labor charges.
- Failure to record all hours worked, including uncompensated overtime.
How to Avoid This:
Implement a robust, DCAA-compliant timekeeping system. This system should require daily entries from all employees and have controls in place that prevent unauthorized changes. Train your team on the importance of accurate time tracking and establish a clear policy that outlines procedures for recording time, making corrections, and obtaining supervisor approval. A reliable system ensures that labor costs are allocated correctly and can withstand audit scrutiny.
Charging Unallowable Costs
The Federal Acquisition Regulation (FAR) Part 31 explicitly defines which costs are allowable, and therefore reimbursable, under government contracts. Billing the government for unallowable costs is a major red flag for auditors and can result in financial penalties.
Common Findings:
- Billing for expenses such as entertainment, alcohol, or lobbying activities.
- Including costs related to advertising and public relations that are not specifically allowable.
- Charging for interest on borrowing or other financial costs.
- Inadequate segregation of allowable and unallowable costs within the accounting system.
How to Avoid This:
The key to avoiding this pitfall is a thorough understanding of FAR Part 31. Your accounting team must be trained to identify and segregate unallowable costs from allowable ones. Your accounting system should be configured to track these costs separately, preventing them from being included in any government billings. Regularly reviewing your expense accounts helps ensure ongoing compliance and reduces the risk of accidental mischarging.
Insufficient Documentation
During an audit, the burden of proof is on the contractor. If you cannot provide sufficient documentation to support a transaction or cost, the DCAA is likely to question it. Vague or missing records make it impossible for auditors to verify the legitimacy and accuracy of your financial reporting.
Common Findings:
- Missing receipts, invoices, or purchase orders for incurred costs.
- Lack of detailed descriptions for expenses, making it difficult to determine their purpose.
- Incomplete subcontractor or consultant agreements.
- Failure to document the methodology used for allocating indirect costs.
How to Avoid This:
Maintain meticulous and organized records for all business transactions. Every expense should be backed by clear, detailed documentation that explains what was purchased, why it was necessary for the contract, and who approved it. Store these records in a centralized, easily accessible location, whether digital or physical. Establishing a strict documentation policy for your team ensures that you have the necessary evidence to support every entry in your books, making the audit process smoother and more transparent.
Preparing for a Successful DCAA Audit
Passing a DCAA audit is not about last-minute preparations; it is the result of maintaining a consistently compliant accounting system. For small and medium-sized businesses, the complexity of government contracting regulations can be a significant challenge. The demands of rapid growth often leave little time for business owners to become experts in DCAA compliance.
By implementing a robust timekeeping system, understanding FAR regulations on cost allowability, and enforcing strict documentation standards, you can build a strong foundation for audit success. These practices not only prepare you for a DCAA review but also improve financial accuracy, enhance decision-making, and position your business for long-term, scalable growth as a government contractor.
